Has anyone seen a lawsuit about prudent selection of investment funds unrelated to expenses or self-dealing?

[Peter Gulia]

So far, it seems there are two kinds of claims that an individual-account (defined-contribution) retirement plan's fiduciary breached its responsibility in selecting a plan's "menu" of investment alternatives for participant-directed investment.

One kind asserts self-dealing.  For example, plaintiffs asserted that ABB made suboptimal investment selections because this resulted in Fidelity's willingness to lower its fee for services used for purposes other than the retirement plan.

And the "proprietary"-funds cases assert that a fiduciary of a retirement plan for employees of a business that's in the business of serving as an investment manager selected "house-brand" funds because the manager had a compensation interest or business interest in the retirement plan's use of those funds for which the manager gets a fee or cares about whether the manager and its employees are seen to "eat their own cooking".

Another kind asserts that the plan could have bought essentially the same investment at a lower expense.

Has anyone seen a lawsuit that alleged a fiduciary selected an investment alternatives that was weak on its investment merits without either kind of claim described above?

 

[CuseFan]

No, and probably because it's difficult to win a lawsuit against poor decision-making. If there wasn't an IPS and the fiduciary(ies) lacked a process which led to the poor decision, then maybe there is more standing to sue. Or to put it bluntly - it's easier to sue (and win, or at least settle) against the unethical (conflict of interest) than the stupid. Also, since the unethical situations usually involve significantly more dollars, they draw the plaintiff attorneys and the real reason for these lawsuits - attorney fees. However, that said, these high profile lawsuits have brought attention to abuses and contributed to lower fees in the industry which means more money for people's retirement, and likely much more collectively than what the classes reap from their lawsuits.

[Peter Gulia]

CuseFan, thanks for your help.

Beyond the unnecessary-expense cases, the only pure prudence case I know is almost 30 years ago:

Whitfield v. Cohen, 682 F. Supp. 188, 9 Empl. Benefits Cas. (BNA) 1739 (S.D.N.Y. March 7, 1988).

And that case was about a selection that was obviously imprudent without considering investment performance.

Has anyone seen a case that challenges a selection of investment funds on grounds other than self-dealing or unnecessary expenses?

[RatherBeGolfing]

As I recall, one of the claims in the Chevron case was that they included a money market fund with modest earnings rather than a stable value fund.  I think that claim was based on expected and actual investment performance rather than self dealing or expenses.  The claim was dismissed, but it is the closest I can think of that fits your question.

 

[ESOP Guy]

1 hour ago, CuseFan said:

No, and probably because it's difficult to win a lawsuit against poor decision-making. If there wasn't an IPS and the fiduciary(ies) lacked a process which led to the poor decision, then maybe there is more standing to sue. Or to put it bluntly - it's easier to sue (and win, or at least settle) against the unethical (conflict of interest) than the stupid. Also, since the unethical situations usually involve significantly more dollars, they draw the plaintiff attorneys and the real reason for these lawsuits - attorney fees. However, that said, these high profile lawsuits have brought attention to abuses and contributed to lower fees in the industry which means more money for people's retirement, and likely much more collectively than what the classes reap from their lawsuits.

What CuseFan is saying what I have always heard from the attorney's I know.  Your decisions don't have to always be right.  You just have to document they were reasonable at the time.  So if you have a good investment policy and stick to it I would suspect it will be hard to lose one of these cases. 

[MoJo]

Just now, ESOP Guy said:

So if you have a good investment policy and stick to it I would suspect it will be hard to lose one of these cases. 

That is a big "if" for many plan sponsors/fiduciaries...  The problem is, the bigger the plan sponsor/plan, the more likely they actually have a process and an IPS (if not expert assistance), and the smaller the plan sponsor/plan, the less likely it is a target (not enough recovery to spend years in litigation).

[RatherBeGolfing]

1 hour ago, MoJo said:

That is a big "if" for many plan sponsors/fiduciaries...  The problem is, the bigger the plan sponsor/plan, the more likely they actually have a process and an IPS (if not expert assistance), and the smaller the plan sponsor/plan, the less likely it is a target (not enough recovery to spend years in litigation).

But as we have seen over and over in these cases, large sponsors still manage to not follow its own well written IPSs, to the point where you sometimes wonder if they even tried...

[MoJo]

1 hour ago, RatherBeGolfing said:

But as we have seen over and over in these cases, large sponsors still manage to not follow its own well written IPSs, to the point where you sometimes wonder if they even tried...

And that is the big "if...."  I often am asked:  "Is it worse to not have an IPS and "wing it" or to have an IPS and not follow it."

My answer:  It's not bad to be a fiduciary, it's just bad to be a bad fiduciary.....

[My 2 cents]

Poor investment results caused by a lack of care in choosing the investments (as opposed to carefully chosen investments with poor actual results) sounds like a fiduciary failure to me. Fiduciaries are supposed to act prudently!

[MoJo]

1 hour ago, My 2 cents said:

Poor investment results caused by a lack of care in choosing the investments (as opposed to carefully chosen investments with poor actual results) sounds like a fiduciary failure to me. Fiduciaries are supposed to act prudently!

It's not a failure to select funds wisely that poorly perform in the future.  It wold be a fiduciary breach to not be cognizant and act accordingly to the poor performance (which may or may not include changing the fund).

Being prudent means following a well defined and appropriate process.  It does not mean being able to actually predict the future.

[Peter Gulia]

RatherBeGolfing, thank you for thinking about the Chevron complaint.

As I read that complaint, it didn't assert that the fiduciaries made a poorly considered decision about which fund to select within funds of the same kind.  Instead, it asserted that the fiduciary's construction of the menu was imprudent by failing to include a category - stable-value - that a prudent fiduciary would have decided should be in the plan's menu.

Or am I superimposing my knowledge to imagine a complaint reasoned differently than the complaint the plaintiff made?

 

[RatherBeGolfing]

3 hours ago, Fiduciary Guidance Counsel said:

RatherBeGolfing, thank you for thinking about the Chevron complaint.

As I read that complaint, it didn't assert that the fiduciaries made a poorly considered decision about which fund to select within funds of the same kind.  Instead, it asserted that the fiduciary's construction of the menu was imprudent by failing to include a category - stable-value - that a prudent fiduciary would have decided should be in the plan's menu.

Or am I superimposing my knowledge to imagine a complaint reasoned differently than the complaint the plaintiff made?

 

I'll re-read the complaint this evening, but as I remember it, the claim was that it was imprudent to select a money market fund for capital preservation because a stable value fund could reasonably be expected to outperform a money market fund.  That would put both in the same category but claim that it was imprudent to select one over the other.  The judge of course disagreed. 

[RatherBeGolfing]

Quote

COUNT I

Breach of Duties of Loyalty and Prudence, and Violation of IPS— Vanguard Prime Money Market Mutual Fund 113.

Plaintiffs restate and incorporate the allegations of the preceding paragraphs. 114. Chevron breached its duties of loyalty and prudence under 29 U.S.C. §§1104(a)(1)(A) & (B) and the provisions of the IPS in violation of 29 U.S.C. §1104(a)(1)(D) by providing participants the Vanguard Prime Money Market Fund instead of a stable value fund, which would have provided participants a low-risk investment with guaranty of principal and accumulated interest and a predictable, higher and more stable rate of interest based on decades of historical performance. Chevron failed to consider a stable value fund as a replacement for the Vanguard Prime Money Market Fund or in addition thereto, failed to come to a reasoned decision for providing the Vanguard Prime Money Market Fund instead of a stable value fund, and failed to remove that imprudent fund from the Plan.

My emphasis.  They also discuss money market vs. stable value fund (as a capital preservation option) earlier in the complaint.

[Peter Gulia]

RatherBeGolfing, thank you for the nice help.

 

[RatherBeGolfing]

Happy to help

[TPAJake]

The portability of stable value funds has become an issue recently on some of my plans during conversions between recordkeepers.  In my fantasy world, that inhibits my ability to select a new service provider for the Plan & places undue burdens on me as a hypothetical Fiduciary if I have to maintain that old stable value fund at the old recordkeeper after the rest of the assets have moved.  I realize this isn't really the question we're addressing here, but it does add depth to the Chevron conversation--Can you imagine how many people would have had money locked up in a stable value on a plan that size?

[MoJo]

38 minutes ago, TPAJake said:

The portability of stable value funds has become an issue recently on some of my plans during conversions between recordkeepers.  In my fantasy world, that inhibits my ability to select a new service provider for the Plan & places undue burdens on me as a hypothetical Fiduciary if I have to maintain that old stable value fund at the old recordkeeper after the rest of the assets have moved.  I realize this isn't really the question we're addressing here, but it does add depth to the Chevron conversation--Can you imagine how many people would have had money locked up in a stable value on a plan that size?

NoT mentIoning Any providers by nAme, right?

[Peter Gulia]

TPAJake, does the problem you describe happen only with insurance company general-account stable-value contracts?  Or could one also encounter difficulties regarding a separate-account stable-value contract?

 

[MoJo]

Not to jump in FGC, but the "put" or hold back is an "insurance issue - and it doesn't matter if is an "insurance company" SVF or other (true) SVF.  What makes the SVF "stable" is an insurance wrapper over various types of the underlying fund (usually a managed bond fund) - which can be a general account product, a separate account product, or a "trust" company based product with that wrap.  Often the underlying fund is a managed bond portfolio and with the wrap is referred to as a "synthetic" GIC.  I helped build one at a mutual fund company I once worked for.  The bond portfolio managers ran the money, a trust company held the assets in a collective trust, and a number of insurance companies shared the wrap exposure - and called the shots on liquidity.  One of the condition of the wrap is the ability to demand that liquidations from the the fund (usually plan sponsor directed, but I've seen participant level holds as well) be suspended for some period of time (usually 12 months, but on "unnamed" service provider has a SVF with a 10 year hold).

Bottom line is "all" true SVF will have the potential for a hold back.  If it doesn't, then it just isn't a "true" SVF.

[Peter Gulia]

MoJo, thank you for the learning.

 

Imagine this hypo:  A retirement plan has a big insurance company as its recordkeeper.  The plan’s investment menu includes a bunch of (non-insurance) investment funds and one stable-value account.  The stable-value is a group variable annuity contract with one insurance company separate account, and the plan’s contract is the only one that uses that separate account.  Under the contract, the plan has a right to take delivery of the separate account’s securities whenever the plan wants to.  The insurer’s guarantee of the declared crediting rate is only one month at a time.

 

The retirement plan has selected a new recordkeeper, another big insurance company.  By the “conversion-out” date, the stable-value account’s current value is below its book value.

 

Couldn’t the retirement plan instruct the “old” insurer to deliver not money but the separate account’s securities to the “new” insurer?

 

Then, the plan and the new insurer set whatever amortization formulas and crediting rates use the separate account’s securities within the risk the new insurer will insure.

 

But what complications am I missing?

 

[My 2 cents]

"Couldn’t the retirement plan instruct the “old” insurer to deliver not money but the separate account’s securities to the “new” insurer?

 

Then, the plan and the new insurer set whatever amortization formulas and crediting rates use the separate account’s securities within the risk the new insurer will insure.

 

But what complications am I missing?"

It may be doubtful that either the old or the new insurer would be willing to move (or accept) assets instead of values? 

I don't practice in the DC plan arena. Are stable value funds required to have guaranteed values or can they merely be relatively low-risk investments?  Why is it unacceptable to transfer less than 100% of the book value?

[MoJo]

1 hour ago, Fiduciary Guidance Counsel said:

MoJo, thank you for the learning.

 

Imagine this hypo:  A retirement plan has a big insurance company as its recordkeeper.  The plan’s investment menu includes a bunch of (non-insurance) investment funds and one stable-value account.  The stable-value is a group variable annuity contract with one insurance company separate account, and the plan’s contract is the only one that uses that separate account.  Under the contract, the plan has a right to take delivery of the separate account’s securities whenever the plan wants to.  The insurer’s guarantee of the declared crediting rate is only one month at a time.

 

The retirement plan has selected a new recordkeeper, another big insurance company.  By the “conversion-out” date, the stable-value account’s current value is below its book value.

 

Couldn’t the retirement plan instruct the “old” insurer to deliver not money but the separate account’s securities to the “new” insurer?

 

Then, the plan and the new insurer set whatever amortization formulas and crediting rates use the separate account’s securities within the risk the new insurer will insure.

 

But what complications am I missing?

 

I have seen situations where in lieu of "put" on the assets (hold back) underlying assets are distributed - BUT in that case, participants have an immediate recognized LOSS, and when a new SVF is established, the "principal" amount would be the value of the assets so distributed, with a crediting rate established by the wrap provider on the basis of that principal amount.

I actually had the reverse situation - where the market value was OVER book, for a separately managed (single plan) SVF.  In attempting to move it and MAINTAIN the excess to provide for the same (higher) crediting rate, we were unable to find authority to do so, unable to convince the old provider to preserve the "structure" so as to maintain the gain, unable to find counsel who would bless the matter, and therefore unable to actually do what was planned.  Assets transferred, a new SVF was created with a basis equal to the principal value of assets transferred, and a new crediting rate more in line with current expectation.

In reality, from the participant's perspective it was a wash - x% on $y assets is the same as x%-z%age points on $y+the same increase in percentages - but the plan sponsor wanted to "advertise" the higher than normal crediting rate - which they "preserved."